New World Bank analysis launched today at a conference co-organized with the Miami Herald “The Caribbean Dilemma” highlights common challenges faced by small economies and identify shared solutions to generate sustainable growth in the region.
“The Caribbean has tremendous economic potential and growth opportunities”, said Tahseen Sayed, World Bank Country Director for the Caribbean. “This conference takes a long-term view and focuses on key priorities and policies for the region that can help boost growth, building on lessons from other small economies”.
A new World Bank study “Open and Nimble: Finding Stable Growth in Small Economies” shows that economic size measured by the size of working age population does not matter to the development and economic growth of countries in Latin America and the Caribbean. In fact, some of the smaller economies in Latin America and the Caribbean such as Panama and the Dominican Republic are growing much faster than the region’s giants.
“The analysis shows that while small economies are more open to trade and foreign investment, and highly specialized in their export sectors, they are also more nimble and able to change the structure of their economies and exports overtime”, said Daniel Lederman, World Bank Deputy Chief Economist and lead author of the report. “Being more nimble can help them remain competitive when facing external shocks. In fact, small economies such as Costa Rica and Caribbean countries have been more successful in reinventing themselves than larger economies”.
Another World Bank report “Taming volatility: Fiscal Policy and Financial Development for Growth in the Eastern Caribbean” shows that countries in the Organization of Eastern Caribbean States (OECS) experienced volatile growth due to their openness to trade, limited economic diversification, exposure to natural hazards, and fiscal policies.
“Tourism is the most important industry in the OECS, ranging from 26 percent of GDP in St Vincent and the Grenadines to 74 percent of GDP in Antigua and Barbuda. Because these are small economies, diversifying sources of growth and revenue is difficult, which makes them particularly vulnerable to trade volatility”, said Francisco Carneiro, World Bank Lead Economist for the Caribbean.
The authors lay out key priorities to promote sustainable growth in the Caribbean and other small economies:
- Deeper regional integration to allow cost sharing and risk pooling would promote stable growth. Small economies often lack the resources to make large public investments. Investing in shared public services, such as a regional transportation infrastructure, would allow cost pooling and improve connectivity in the region. The Caribbean Catastrophe Risk Insurance Facility is an example of effective and attractive risk pooling mechanism able to mobilize emergency funds within the first two weeks of a disaster.
- Counter-cyclical fiscal policy can help mitigate the impact of trade volatility in the OECS. Adopting fiscal responsibility laws and fiscal rules is key for these countries, allowing them to save more during good times in case natural disasters or economic shocks occur. Grenada is setting the example in the region and recently adopted a medium-term fiscal framework anchored on clear spending rules.
- A stronger financial sector remains a priority, particularly for Eastern Caribbean countries. A new Banking Act to improve banking supervision and future consolidation has been passed, which is an important step to improve access to finance.